4% withdrawal even with the drop ?

[Moemg]

I was wondering how many are sticking with the 4% withdrawal even while the market drops . I have a lot of extra padding in my budget so I'm dropping back to under 3% until I see some positive signs .

[ziggy29]

Unless you think something worse than the Great Depression is coming, 4% should hold.

I don't know that people have been this panicked about their money in more than 60 years, and if that feeling persists or gets worse, you never know what self-fulfilling prophecies may lie ahead.

[tangomonster]

I was doing less than 4% even before the drop-----

but if my net worth keeps shrinking I may have to end up doing much more than 4%! Scary!

[samclem]

If you are using the "4% of year end balance" rule, your withdrawals reduce automatically when your portfolio declines. That's one of the nice features of that model--it explicitly accounts for the behavior most of us actually exhibit when things get rough.

Time for a gut check for those counting on the "4% of begining balance + inflation forever" withdrawal model. If, today, you aren't comfortable withdrawing some pre-determined amount regardless of market conditions, maybe you should switch withdrawal models and see what FIRECALC gives as a result. Imagine we were having 10% inflation and your portfolio were really down 5%, would you REALLY just automatically withdraw the pre-set amount from the previous year (representing 4% of the start value with all the inflation updates) plus 10% extra to account for inflation?

[ziggy29]

Quote:

Originally Posted by samclem Time for a gut check for those counting on the "4% of begining balance + inflation forever" withdrawal model. If, today, you aren't comfortable withdrawing some pre-determined amount regardless of market conditions, maybe you should switch withdrawal models and see what FIRECALC gives as a result. Imagine we were having 10% inflation and your portfolio were really down 5%, would you REALLY just automatically withdraw the pre-set amount from the previous year (representing 4% of the start value with all the inflation updates) plus 10% extra to account for inflation?

Keep in mind that this model survived the Great Depression and the high inflation bad market of the 1970s. We tend to have short memories about things like this that make us think these are the worst and the scariest times ever.

Having said that, just because "4% plus inflation for life" hasn't ever failed with a 60/40 portfolio doesn't mean it *can't* fail. Then again, there are no guarantees for *any* level.

[cute fuzzy bunny]

Its probably prudent to cut back a little when times are tough. I certainly wouldnt be pulling extra money out just to meet the 4% guideline.

Quote:

Originally Posted by ziggy29 Keep in mind that this model survived the Great Depression and the high inflation bad market of the 1970s. We tend to have short memories about things like this that make us think these are the worst and the scariest times ever. Having said that, just because "4% plus inflation for life" hasn't ever failed with a 60/40 portfolio doesn't mean it *can't* fail. Then again, there are no guarantees for *any* level.

Yeah, but many of those successful runs almost failed or came down to extremely low balances. I think the good question here is whether people would be brave enough to keep taking their 4% when they were down 40-50-60%. Heck, just a little bear market has everyone eying the windows.

Quote:

Originally Posted by haha What I find really funny is that for years anyone who suggested on these forums that valuation of stocks mattered in choosing a withdrawal rate was stoned.

When did that happen, because I dont remember it? I do remember one guy who mentioned valuations as part of his trolling routine. Since that guy was banned by 12 other forums and two of them collapsed as part of his antics, it seems like kicking him off was reasonable and prudent.

That guy also proposed a valuation system that would have kept people out of the stock market since 1993.

How would that have worked out for you folks?

[W2R]

Quote:

Originally Posted by cute fuzzy bunny J(...) but many of those successful runs almost failed or came down to extremely low balances. I think the good question here is whether people would be brave enough to keep taking their 4% when they were down 40-50-60%. Heck, just a little bear market has everyone eying the windows.

Other than bravery, there are aesthetic aspects to consider. Maybe I could afford to take some maximum SWR each year for life, but I like seeing that my nestegg is over "X dollars" in size.

If I cut back a little during bear markets while still living the good life, and that helps the nestegg recover more quickly, that would make me happy. It might or might not be strictly NECESSARY, but it might be something that makes me happy.

Doesn't mean I'm chicken or about to jump out of a window - - just means that a nice, plump nestegg is a beautiful sight to behold.

[audreyh1]

Quote:

Originally Posted by samclem If you are using the "4% of year end balance" rule, your withdrawals reduce automatically when your portfolio declines. That's one of the nice features of that model--it explicitly accounts for the behavior most of us actually exhibit when things get rough.

That's how I handle getting more conservative when my portfolio shrinks. But I don't have to worry about it until next January and who knows what things might look like then.

Audrey

[W2R]

I won't be in the withdrawal phase until next year, but naturally have been thinking about this, since it looks like I may be retiring into a bear market at the very least.

With my conservative asset allocation and longevity genes, I am figuring on withdrawing less than 4% even in a good economy. (When I say 4%, or some other percentage, I tend to think in terms of samclem's "4% of the year-end balance" of my portfolio.)

When the economy is not good, my portfolio will be dwindling and I will not like that. So, knowing myself, I am pretty sure that I will withdraw only around 1.5% or less at times such as we have been experiencing recently.

When the economy is healthy and vibrant, or if my portfolio exceeds a certain value even in a crummy economy, I might withdraw as much as 3% - 3.5% if I could think of something to spend it on. I will probably ease into that, though, since that would be substantially more I am used to spending.

[rogersteciak]

In Work Less, Live More, there is the 95% Rule, which says to tighten your belt and take out only 95% of last year's withdrawal in tough times (even if the amount you withdraw exceeds your normal safe withdrawal rate).

[Dawg52]

Quote:

Originally Posted by tangomonster I was doing less than 4% even before the drop-----

I could cut golf if I had to, but I would stick my head in a gas oven if it comes to that point. My w/d rate is much less than 4%, so I should be able to keep teeing it up.

[ladelfina]

gas oven <=> no golf?

[lazygood4nothinbum]

my brother & sil are a little upset with me that i'm not on vacation with them right now. but i just can't justify to myself spending any more money than need be when times don't look so good. to make this even more absurd, they were paying for everyone; it wouldn't have cost me a dime.

i find that even with my daily gas use. it's not like an extra thousand bucks a year in gas makes much of a difference. i just don't like the idea of spending so much money when i can do without it.

i may be cheap, but at least i'm not broke.

[Darryl]

[quote=lazygood4nothinbum;682266]my brother & sil are a little upset with me that i'm not on vacation with them right now. but i just can't justify to myself spending any more money than need be when times don't look so good. to make this even more absurd, they were paying for everyone; it wouldn't have cost me a dime.

LG4NB, you are holding the reins too tight if you're uncomfortable going on a free family outing.

[unclemick]

There is this here psych er logical problem. In my heart I'm a cheap bastard. After 2006's 5% variable and not getting any younger - I'm trying to keep my spending up in the 4-5% of portfolio range but my subconscious is with pssst Wellesley - don't spend more than you are getting in dividends and interest (3 to 3.5%). Note that I own Target 2015 not Wellesley.

My comfort zone seems to be running less than 4% - on paper(IMHO) it should be more and at least it's more than my checked bursts of 'extreme frugal' of the past(early ER in the 90's).

heh heh heh - hormones!, behavioral, what the heck .

[FIREdreamer]

I am not yet retired but this year we have definitely curtailed our spending (5-10% lower than last year) even though our income has increased about 20%. Most of the curbing seems to be done unconsciously because we don't really feel like we are cutting back, but the truth is we must be. Maybe it's just watching the news and feeling all the gloom and doom, I don't know.

[haha]

If you are not liquidating stocks, it doesn't matter whether the market is up or down. 4% is either OK, or not OK, a priori to market distress.

What counts is the underlying earning power of your investments.

OTOH, if you want to save money to pour it into stocks at recent prices, then cutting back may be a good idea.

What I find really funny is that for years anyone who suggested on these forums that valuation of stocks mattered in choosing a withdrawal rate was stoned.

Now, it seems like some are indeed closet believers in valuation- although they seem to have applied the principle backwards. After all, valuations are better today than they were when the market was >20% higher, aren't they?

Ha

[Alan]

I'm only planning a 2.5% withdrawal, but if I was on a 4% withdrawal plan and my investments lost more than 5% by year end then I would withdraw the same as the year before (no inflation adjustment). More than 10% then I'd be looking at more serious cutbacks in spending.

[ziggy29]

Quote:

Originally Posted by haha What I find really funny is that for years anyone who suggested on these forums that valuation of stocks mattered in choosing a withdrawal rate was stoned. Now, it seems like some are indeed closet believers in valuation- although they seem to have applied the principle backwards. After all, valuations are better today than they were when the market was >20% higher, aren't they?

Great point. It goes to show that the best plans on paper are only good as the emotional resolve to follow them.

The 4% rate was tested to weather the Depression of the 1930s and the low-growth, inflationary 1970s. So if someone believed in 4% on that basis, I would submit that they have to be convincing themselves that this will be worse than BOTH of those events in order to justify dropping the rate if they believed it survived those previous lousy markets. Either that or they are discovering that fear trumps reason.

IMO, it's a perfect example of emotions like greed and fear clouding rational thinking.

If nothing else, the 4% theory is being shown as just another general truism that people abandon in bad and uncertain times -- *exactly* the kind of times that number was created to survive.

[rogersteciak]

Quote:

Originally Posted by ziggy29 Great point. It goes to show that the best plans on paper are only good as the emotional resolve to follow them. The 4% rate was tested to weather the Depression of the 1930s and the low-growth, inflationary 1970s. So if someone believed in 4% on that basis, I would submit that they have to be convincing themselves that this will be worse than BOTH of those events in order to justify dropping the rate if they believed it survived those previous lousy markets. Either that or they are discovering that fear trumps reason. IMO, it's a perfect example of emotions like greed and fear clouding rational thinking. If nothing else, the 4% theory is being shown as just another general truism that people abandon in bad and uncertain times -- *exactly* the kind of times that number was created to survive.

I agree with this post. The subconscious mind (according to the book Think and Grow Rich) overrides rational thought when one is "losing money" and the emotional response is to sell no matter how low the price (which is otherwise known as "capitulation"). But through autosuggestion and preparation, one can condition one's subconscious mind to behave differently when under fire from a declining market (or under temptation from a rising market).

That is why value investors are taught to stay within their circle of competence and to know what the value is of the fractional ownership interests in the wonderful businesses (i.e., securities) they are buying. They will be able to tell the difference between a "falling knife" and "fallen angel" and have the confidence to react accordingly (i.e., stay away from a falling knife and consider buying more of a fallen angel if appropriate in terms of one's overall portfolio).

Another aspect of one's reaction to market conditions is one's liquidity situation. Money needed within the next five years for living expenses should not be in the stock market because the market can be down for long periods of time. If one needs to cash out investments within the next few weeks or months to pay living expenses and the market is way down, that is extra stress one can do without (i.e., it's easier to sleep well when you don't need to sell any of your securities for another five years when the market is tanking).

All of this takes planning ahead of time. Think through various market scenarios and write down how you would want to react. Everyone thinks they will be able to buy low if the market tanks (because they want to "buy at the bottom") and be able to sell right before the peak of the bubble (because they want to "sell at the top"). This is much easier said than done, but mentally rehearsing one's responses to various scenarios takes some of the emotion out of the situation when the actual situation happens.

Also, think of this market condition as a dress rehearsal for its next occurrence. While every bear market is different, they do have one thing in common -- the ability to cause investors to make serious mistakes that are driven by emotional reactions to financially stessful situations. But you can condition yourself to be Mr. Spock cool (or Mr. Buffett cool) to these kinds of situations and take advantage of them by being on the other side of the transactions of those people who are capitulating due to their emotions.